Budget 2012: Why government should not impose tax on diesel vehicles

Last year, the diesel factor decided the winners and losers in the automobile industry. This year too, diesel continues to hog mindspace.

There have been strong hints that the financially stretched government, which has to bear an annual subsidy of Rs 67,000 crore on diesel, is contemplating imposing a tax on diesel vehicles.

In the past one year, sales of diesel vehicles have surged even as the price difference between petrol and diesel is at a high Rs 24.73 per litre (in Delhi). Petroleum minister Jaipal Reddy has talked about a flat Rs 80,000 penalty tax on all new diesel cars sold in the country.

The industry is confused how a Rs 4-lakh diesel car should invite the same penalty tax as Rs 20-lakh luxury one. And they hope the government will understand this. But more importantly, companies across the board are hoping that the government will lay down a long-term fuel roadmap for India.

"It is this uncertainty that bothers them more than anything else," says Mohit Arora, executive director (Asia Pacific), JD Power.

GOVERNMENT

The Noise: Government spends over Rs 67,000 crore on diesel subsidy every year. A lot of this subsidy goes to buyers of expensive cars.

The Fact: Yes, petrol-diesel price difference has sharply boosted diesel car sales, its share has risen from 30% to 40% of total cars in the past one year. But diesel used by cars is under 7% of the total.

The Reality: This is the best politically viable move today. It will get government some revenues, hopefully dent sales of diesel cars. But all this will not do much to ease the subsidy burden that is bothering the government.

COMPANIES

The Noise: Targeting and penalising an engine type is wrong. Instead, increase the diesel price by Re 1 to generate extra revenue for the government.

The Fact: Industry does not get it. This isn't so much about economics but politics. In a country with 1.2 billion people where 2 million vehicles are sold annually, cars are still a luxury.

The Reality: For car companies across the board, grappling with idle petrol and stretched diesel capacity, this should bring small relief. But what all of them want badly is a clear roadmap to fuel policy and some long-term certainty.

CUSTOMERS

The Noise: Rise in cost of diesel cars will dent consumer demand.

The Fact: Car, a discretionary item, is more dependent on sentiments, interest rates and other factors. Anyway, most car firms had increased prices of diesel variants to cash in on the demand surge.

The Reality: For cheaper low-end cars, penalty tax on diesel will impact. But interest rates, economic environment will have a bigger impact on them. At the top end of costlier cars, the demand anyway is not so price sensitive.

GREEN LOBBY

The Noise: India's green lobby says diesel is a dirty fuel and hence its usage must be discouraged by the government.

The Fact: Yes, diesel does release more NOx and particulate matter. But it is also true that it releases far lesser

carbon dioxide.

The Reality: Almost half of all cars sold in Europe, one of the most environmentally conscious regions, run on diesel. It is also true that today's diesel engines offer at least 25% more mileage than petrol, making it a more energy-efficient fuel.